Author Topic: I think we have too much in our 401ks  (Read 7627 times)

LiseE

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I think we have too much in our 401ks
« on: February 16, 2017, 12:30:45 PM »
Hello  ...

My hubby and I have a combined total of 840K in our 401K's.  We are both still working .. he is a contractor and I working in the corporate rat race still but hoping to pull the plug in the next year or two.  We are both 50.

My 401K has a dismal match (50% on 3%) ... I suppose I should at least keep that going.  But since we are not planning on touching our 401K's for another 15 years, we need to start stashing $$ away that is accessible .. to live off of until we reach 59. 

We currently do not have taxable account .. should we start putting $$ in a taxable account?  We are both high income earners .. just need to build up a liquid account while we pay off mortgage so we can be finally FI.

Thoughts?
 
« Last Edit: March 02, 2017, 12:25:49 PM by LiseE »

DoubleDown

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Re: I think we have two much in our 401ks
« Reply #1 on: February 16, 2017, 12:39:02 PM »
should we start putting $$ in a taxable account?

Yes!!

Also, check out the posts on the various methods to access 401k's and IRA's without penalty prior to age 59.5. I'm too lazy to find them, I'll leave that up to you :-) But the fact is there are several good ways to access that money without paying penalties or onerous taxes.

At any rate, continue maximizing contributions to those 401k and IRA accounts for the tax benefits and employer matching funds (even if they're not that great), PLUS put away as much money as you can in taxable investments. You really want both.

If you haven't already, I hope you're already finding ways to lower your living expenses. With just a year or two or three of putting away those high incomes in taxable accounts, you could easily retire early. Congrats!

LiseE

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Re: I think we have two much in our 401ks
« Reply #2 on: February 16, 2017, 01:26:02 PM »
Thanks DoubleDown for the nudge to look at ways to access that money prior to turning 59.5 but I think from what I've read about conversion ladder is that you are taxed on the amount that you rollover into your IRA at your current tax rate .. which currently for us is quite high so it didn't seem like the correct option. 

We have been working on killing our expense and now only have our mortgage to payoff and save in a more liquid account.

:-)

moof

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Re: I think we have two much in our 401ks
« Reply #3 on: February 16, 2017, 02:10:03 PM »
Hello  ...

My hubby and I have a combined total of 840K in our 401K's.  We are both still working .. he is a contractor and I working in the corporate rat race still but hoping to pull the plug in the next year or two.  We are both 50.

My 401K has a dismal match (50% on 3%) ... I suppose I should at least keep that going.  But since we are not planning on touching our 401K's for another 15 years, we need to start stashing $$ away that is accessible .. to live off of until we reach 59. 

We currently do not have taxable account .. should we start putting $$ in a taxable account?  We are both high income earners .. just need to build up a liquid account while we pay off mortgage so we can be finally FI.

Thoughts?

Even taking the 10% penalty is almost certainly better to shove money into a 401k and traditional IRA than taxable.  So yes, you should be putting money into taxable AFTER maxing out 401k and traditional IRA's if applicable.

If you expect a modest retirement most of your 401k will come out at 0 or 10% tax, adding in a 10% penalty still only gets you to 10-20% tax rate when pulling it out, and only during the few years before you hit 59.5.  If you put it in taxable today you lock in the 25% tax bracket you are likely at forever.

Using 401k before 59.5 is plenty doable, see this link for a nice summary:
http://www.madfientist.com/how-to-access-retirement-funds-early/

robartsd

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Re: I think we have two much in our 401ks
« Reply #4 on: February 16, 2017, 02:29:55 PM »
Even taking the 10% penalty is almost certainly better to shove money into a 401k and traditional IRA than taxable.  So yes, you should be putting money into taxable AFTER maxing out 401k and traditional IRA's if applicable.

If you expect a modest retirement most of your 401k will come out at 0 or 10% tax, adding in a 10% penalty still only gets you to 10-20% tax rate when pulling it out, and only during the few years before you hit 59.5.  If you put it in taxable today you lock in the 25% tax bracket you are likely at forever.

Using 401k before 59.5 is plenty doable, see this link for a nice summary:
http://www.madfientist.com/how-to-access-retirement-funds-early/

Back of the napkin calculation with your numbers:

Assuming your 840k makes 5% this year and you max your contributions at 18k each and get 2k in match your 401(k)s would grow to 920k in a year. This supports 36.8k in annual expenses based on a 4% SWR. After taking out 12.6K standard deduction, you'd be left with 24.2k/year taxable income. Your federal income tax would be about 6.4k including early withdraw penalty on that amount. If you're in the 25% tax bracket, you save 9k contributing 36k to deductible retirement accounts.

wienerdog

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Re: I think we have two much in our 401ks
« Reply #5 on: February 16, 2017, 04:48:49 PM »
You can pull the plug in the year you turn 55 and withdraw from your current 401k if you retire from the job that has the 401k.  You won't be able to access other retirement accounts until 59.5 unless you pay the penalty.  See IRS publication 575

Roll any other old 401k into your current account so you can get to the money.
« Last Edit: February 16, 2017, 04:54:03 PM by wienerdog »

dividendman

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Re: I think we have two much in our 401ks
« Reply #6 on: February 16, 2017, 05:06:42 PM »
You can pull the plug in the year you turn 55 and withdraw from your current 401k if you retire from the job that has the 401k.  You won't be able to access other retirement accounts until 59.5 unless you pay the penalty.  See IRS publication 575

Roll any other old 401k into your current account so you can get to the money.

That's not true. You can start substantially equal periodic payments from both a traditional IRA and 401k at any time, tax free. You can also withdraw (after 5 years) any contributions to a Roth IRA without penalty.

LiseE

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Re: I think we have two much in our 401ks
« Reply #7 on: February 16, 2017, 05:17:12 PM »
Quote
If you put it in taxable today you lock in the 25% tax bracket you are likely at forever

I thought that if you hold onto you investment longer than a year you are taxed at lower capital gains tax?

Quote
You can start substantially equal periodic payments from both a traditional IRA and 401k at any time, tax free
Is this true?  Is this a SEPP? 

dividendman

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Re: I think we have two much in our 401ks
« Reply #8 on: February 16, 2017, 05:26:05 PM »
Quote
If you put it in taxable today you lock in the 25% tax bracket you are likely at forever

I thought that if you hold onto you investment longer than a year you are taxed at lower capital gains tax?

Quote
You can start substantially equal periodic payments from both a traditional IRA and 401k at any time, tax free
Is this true?  Is this a SEPP?

Sorry, not tax free, penalty free. You'd still have to pay tax on it. Yes, it's SEPP.

wscott

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Re: I think we have two much in our 401ks
« Reply #9 on: February 16, 2017, 06:07:35 PM »
Fun. I just wrote a calculator for this sort of thing.

http://forum.mrmoneymustache.com/taxes/wrote-a-retirement-calculator-because-i-orp-com-didn't-do-what-i-want/

(i-org.com is a much more complete tool, but doesn't model this type of early retirement)

If I tell it you have $840k in a tax-deferred account and nothing else saved and retired now this is what it returns:

Code: [Select]
Yearly spending <=  55800

 age saving  spend    IRA   fIRA   Roth  fRoth  IRA2R   rate    tax  spend
 50:      0     -0    840     74      0      0     23     15     18     56
 51:      0      0    803     76     25      0     26     25     19     57
 52:      0      0    757     78     55      0     30     25     20     57
 53:      0      0    702     80     91      0     33     25     22     58
 54:      0      0    636     74    134      0      0     15     14     60
 55:      0      0    607     46    145     23      0     15      7     62
 56:      0      0    606     43    132     26      0     10      6     63
 57:      0      0    608     40    114     30      0     10      6     64
 58:      0      0    613     37     91     33      0     10      5     65
 59:      0      0    622     60     63     11      0     15      4     66
 60:      0      0    607     62     56      9      0     15      4     67
 61:      0      0    588     65     51      8      0     15      5     69
 62:      0      0    565     68     46      7      0     15      5     70

The columns are explained at the bottom here: https://github.com/wscott/fplan
The numbers are all in thousands of dollars

It decided that you can afford to spend $56k/yr on that money and make it to age 70 when Social Security will cover most of those expenses.  This is with investments making 8% and assuming a 2% inflation. The actual numbers are not that important, what we are looking at is the shape of what it is doing.

Basically, you have 5 years where you have to live off your IRA. It withdraws enough to live and to does an IRA2Roth conversion.  These years pay high taxes because you have a lot of income and are paying a 10% penalty on the withdrawals. Starting at age 55 you can start to spend the contributions to the Roth account. You are still spending from the IRA, but Roth money means you stay mostly in the 10% tax bracket.  Notice that 10% tax + 10% penalty is cheaper than doing a larger Roth conversion in the 25% bracket in those first 5 years.

After you hit 59.5, then you can start spending from the IRA.  Interestingly, it doesn't find any benefit from doing any more Roth conversions.

If you had aftertax savings, then that money would be used to cover part of that 5-year gap before the Roth pipeline gets started and you end up spending less money.

If you tried to use 72(t) then you would be able to withdraw like $35k/yr from that IRA max. And you would be stuck at that number. If you change anything in the next 9 years then you need to pay the 10% retroactively.  In never seemed like a good idea for me.

-Wayne

Disclaimer:  I am just learning this stuff and may be completely wrong. Double check anything I say and others please send feedback if I am saying something bogus.
« Last Edit: February 16, 2017, 06:09:43 PM by wscott »

Car Jack

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Re: I think we have two much in our 401ks
« Reply #10 on: February 16, 2017, 08:04:49 PM »
Please don't feel that a 50% match on 3% is dismal.  It seems that many who frequent investing forums seem to think that everyone gets 10% 100% matches or something.  My present job sounds like a Monte Python formula.  50% of the first 4% voted by the board quarterly and vested over 5 years.  I'd take your match any day of the week.  I won't complain though....my last job paid 0% match.


moof

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Re: I think we have two much in our 401ks
« Reply #11 on: February 16, 2017, 10:00:24 PM »
Quote
If you put it in taxable today you lock in the 25% tax bracket you are likely at forever

I thought that if you hold onto you investment longer than a year you are taxed at lower capital gains tax?

Quote
You can start substantially equal periodic payments from both a traditional IRA and 401k at any time, tax free
Is this true?  Is this a SEPP?

SEPP avoids the penalty, but withdrawals are taxed as income (not as wages however, no FICA taxes).

Let's start with 10,000 gross income after any FICA deductions (can't avoid no matter what) and see what you end up with later.

401k gets you 10k in your account today, since it is pre-tax.  Later you might pay 10% penalty only before you hit 59.5 if SEPP is not enough (or is too inflexible), and then income taxes on some of it depending on what annual deductions you can use each year.  For my situations I am expecting about 5% net tax rate from the calculations I have run for about $50k annual spending.  Even with penalties (if I didn't SEPP) that is 15% max loss to taxes and penalties, or 8500 minimum in my pocket pulled out later (and hopefully in a lower income tax state than I am currently in), scaled up by market gains.  With some planning I can avoid the penalties and lose on average 5% and can spend 9500, scaled by market gains.

Taxable is taxed at 25% today before I even get my hands on it (34% total here in Oregon), so I start with 7500 (or 6600 for me).  At withdrawal I have a ton of flexibility without getting penalties or much taxation, but I will probably pay almost no capital gain taxes at withdrawal due to how capital gains are not taxes for lower tax brackets.  I also get to pay taxes on dividends at 15% until I retire and get into a lower tax bracket where capital gains will be down to 0% for reasonable income, but I will ignore that.

So for me it is 6600 vs 9500 available at the back end, both would be further scaled by an equal percentage by market performance.

So I max out all the pre-tax accounts before my taxable contributions and will have about 15% of my money in Roth principal and my taxable account to handle lumpy stuff while doing SEPP off of a large chunk of my 401k for 12 years.
« Last Edit: February 16, 2017, 10:19:28 PM by moof »

overwhelmed

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Re: I think we have two much in our 401ks
« Reply #12 on: February 18, 2017, 12:18:50 PM »
Hello  ...

My hubby and I have a combined total of 840K in our 401K's.  We are both still working .. he is a contractor and I working in the corporate rat race still but hoping to pull the plug in the next year or two.  We are both 50.

My 401K has a dismal match (50% on 3%) ... I suppose I should at least keep that going.  But since we are not planning on touching our 401K's for another 15 years, we need to start stashing $$ away that is accessible .. to live off of until we reach 59. 

We currently do not have taxable account .. should we start putting $$ in a taxable account?  We are both high income earners .. just need to build up a liquid account while we pay off mortgage so we can be finally FI.

Thoughts?

I am also 50 & while I do have a taxable account, the majority of my retirement funds are also in my 401k.

I would suggest you call the administrator of your 401k & ask them about the "Rule of 55"
https://www.irs.gov/retirement-plans/plan-participant-employee/retirement-topics-tax-on-early-distributions

Until I read the pinned post at the top of this page 'How to withdraw funds...' I had never heard of that rule before, I always heard 59 1/2.

At the bottom of the page is the Separation of Service box:
..the employee separates from service during or after the year the employee reaches age 55 (age 50 for public safety employees of a state, or political subdivision of a state, in a governmental defined benefit plan) - the box 'withdraw without penalty' - yes

I called TRowe who administers my current 401k & after they first told me they would take out the 10% and I would need to get it back when I did my taxes.....I may have asked if there was a special reason they were choosing to comply with one IRS rule (59 1/2 rule) & ignoring another (Rule of 55). So after a bit of research, they confirmed that if I separate from my employer after my 55th birthday I will have access to my 401k without penalty.

I think having a taxable account and a Roth provides me options but knowing that I will have access to one of my 401k plans at 55 has helped lower the level of uncertainty.


makinbutter

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Re: I think we have two much in our 401ks
« Reply #13 on: February 19, 2017, 11:27:44 AM »
You can pull the plug in the year you turn 55 and withdraw from your current 401k if you retire from the job that has the 401k.  You won't be able to access other retirement accounts until 59.5 unless you pay the penalty.  See IRS publication 575

Roll any other old 401k into your current account so you can get to the money.

That's not true. You can start substantially equal periodic payments from both a traditional IRA and 401k at any time, tax free. You can also withdraw (after 5 years) any contributions to a Roth IRA without penalty.

The bolded is not factually correct - you can withdraw your contributions to a Roth IRA without penalty AT ANY TIME, and you do not/not need to wait five years.

erutio

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Re: I think we have two much in our 401ks
« Reply #14 on: February 19, 2017, 01:18:48 PM »
You can pull the plug in the year you turn 55 and withdraw from your current 401k if you retire from the job that has the 401k.  You won't be able to access other retirement accounts until 59.5 unless you pay the penalty.  See IRS publication 575

Roll any other old 401k into your current account so you can get to the money.

That's not true. You can start substantially equal periodic payments from both a traditional IRA and 401k at any time, tax free. You can also withdraw (after 5 years) any contributions to a Roth IRA without penalty.

The bolded is not factually correct - you can withdraw your contributions to a Roth IRA without penalty AT ANY TIME, and you do not/not need to wait five years.

Maybe what dividendman means is that you can withdraw conversions from tIRAs after 5 years in a Roth.  Since we are talking about ladders in this thread.

erutio

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Re: I think we have two much in our 401ks
« Reply #15 on: February 19, 2017, 01:22:53 PM »
Thanks DoubleDown for the nudge to look at ways to access that money prior to turning 59.5 but I think from what I've read about conversion ladder is that you are taxed on the amount that you rollover into your IRA at your current tax rate .. which currently for us is quite high so it didn't seem like the correct option. 

We have been working on killing our expense and now only have our mortgage to payoff and save in a more liquid account.

:-)

This isn't quite right. When you retire, you roll over your entire 401k into tIRAs.  This rollover is not taxed.  Then each year, you convert a year worth of expenses from the tIRA to your Roth.  This conversion will be taxed at your then marginal rate, which should be lower since you are retired. 
After doing this for 5 years, you can withdraw the principal of the conversion you made 5 years ago into the Roth.  Each subsequent year, you can withdraw up to the amount you converted in the year 5 years ago.  You are allowed to withdraw conversions penalty free from a Roth after 5 years.
So you just need 5 years worth of expenses in taxable accounts.

wscott

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Re: I think we have two much in our 401ks
« Reply #16 on: February 19, 2017, 01:30:51 PM »
Go read the numbers in the table I posted and you will see that that is exactly what it is doing. But it isn't doing "a year worth of expenses", that is too much and you would pay to much in taxes up front.  Best to have a balance.

Dicey

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Re: I think we have two much in our 401ks
« Reply #17 on: February 19, 2017, 02:30:06 PM »
Please don't feel that a 50% match on 3% is dismal.  It seems that many who frequent investing forums seem to think that everyone gets 10% 100% matches or something.  My present job sounds like a Monte Python formula.  50% of the first 4% voted by the board quarterly and vested over 5 years.  I'd take your match any day of the week.  I won't complain though....my last job paid 0% match.
Agreed. It's still free money, why walk over it?

moof

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Re: I think we have two much in our 401ks
« Reply #18 on: February 19, 2017, 03:38:48 PM »
These can be mixed and matched as well, depending on your situation.  You need not SEPP your whole IRA, say you SEPP 75%.  Then, rather than trying to live 100% on your taxable and any existing Roth contributions, you can use just a portion of it to fill outyour income spread over a long period.  You can then take the 10% penalty on just what you need to raid to fill in the gaps.  If you have a low spending year, you can partially convert to a Roth up to where you would hit whatever tax bracket you are avoiding.

By way of example, my balances are projected to be:
$180k taxable (not quite 3 years expenses due to $22k/year mortgage that will still have a few years).
$80k Roth, with $60k acceessible.
$1.3M in 401k/IRA

My intent is to SEPP $1M, for about $40k as a baseline to work with.  Another $30k can be drawn down from Roth and taxable until the mortgage is paid off.  Then I'll only be needing only $10k/year that can be SEPP of the remainder, or just take the penalty.  Total penalty is not too bad, only about $5-6k total in my situation.

Miss Piggy

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Re: I think we have two much in our 401ks
« Reply #19 on: February 19, 2017, 04:50:56 PM »
"I'll take first world mustachian problems for a thousand, Alex..."

dividendman

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Re: I think we have two much in our 401ks
« Reply #20 on: February 20, 2017, 10:44:29 AM »
"I'll take first world mustachian problems for a thousand, Alex..."

I never understand these comments... of course we're talking about first world mustachian problems... we're first world mustachians after all, why would we talk about land mines or malaria?

Miss Piggy

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Re: I think we have two much in our 401ks
« Reply #21 on: February 20, 2017, 10:57:02 AM »
"I'll take first world mustachian problems for a thousand, Alex..."

I never understand these comments... of course we're talking about first world mustachian problems... we're first world mustachians after all, why would we talk about land mines or malaria?

Just a little humor, that's all.

Generally speaking, most people have the opposite problem...not nearly enough in their 401(k)s...so I just found the problem to be a little humorous, in a good way.

starguru

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Re: I think we have two much in our 401ks
« Reply #22 on: February 20, 2017, 11:12:06 AM »
Hello  ...

My hubby and I have a combined total of 840K in our 401K's.  We are both still working .. he is a contractor and I working in the corporate rat race still but hoping to pull the plug in the next year or two.  We are both 50.

My 401K has a dismal match (50% on 3%) ... I suppose I should at least keep that going.  But since we are not planning on touching our 401K's for another 15 years, we need to start stashing $$ away that is accessible .. to live off of until we reach 59. 

We currently do not have taxable account .. should we start putting $$ in a taxable account?  We are both high income earners .. just need to build up a liquid account while we pay off mortgage so we can be finally FI.

Thoughts?

Depending on your tax situation, I would always max out 401k before contributing to personal investment accounts.  Especially if one is self employed.  If you are both high income earners, my brain is hurting understanding when you say you have no savings outside of 401k. 

I think you guys should be maxing out tax deferred space AND making after tax investments/savings.

dandarc

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Re: I think we have two much in our 401ks
« Reply #23 on: February 20, 2017, 11:19:01 AM »
Didn't see a link to the post on this - http://forum.mrmoneymustache.com/investor-alley/how-to-withdraw-funds-from-your-ira-and-401k-without-penalty-before-age-59-5/

In your shoes, going with SEPP works pretty well - the lack of flexibility isn't as big of a deal when your time-frame is 5-10 years and not 20-30 years.

And, push comes to shove, paying the penalty isn't a disaster either.

aceyou

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Re: I think we have two much in our 401ks
« Reply #24 on: February 20, 2017, 12:16:41 PM »
The millionaireeducator, aka, ed mills, lives off SEPP distributions. 

Here's one of his posts on the topic:  http://www.millionaireeducator.com/2017/01/faq-2-what-do-you-live-on.html

Sounds to me like you absolutely want to keep pumping more and more money into your 401k for reasons mentioned by several posters above.  You will NOT need to pay a penalty to get the money out. 

Congratulations on building a stache.  Enjoy waking up, figuring out what you want to do that day, and then doing exactly that each and every day!!!

LiseE

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Re: I think we have two much in our 401ks
« Reply #25 on: February 23, 2017, 10:19:44 AM »
Quote
If you are both high income earners, my brain is hurting understanding when you say you have no savings outside of 401k. 

We only recently (last 4 years) discovered this blog and have spent the last several years righting our ship.  We are FINALLY at the point where we have no debt except mortgage which has such a low interest rate (3.4%) that investing, rather than paying the mortgage off, is a better choice I believe.  I do LOVE the peace of mind that comes from the thought of not having a mortgage but financially I think maxing out 401K's and then investing into a taxable is the way to go for now. 


soccerluvof4

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Re: I think we have two much in our 401ks
« Reply #26 on: February 23, 2017, 11:20:49 AM »
Paying off your mortgage is more a piece of mind thing.  To get into the mathematics of it all is a whole different argument based on a whole lot of speculation and investment guessing. If you sleep at night with the mortgage that's all that should matter with the rate your paying imho. I never was good owing money, kept me up at night so made sure I never had one. You guys are doing well! kudos

ChpBstrd

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Re: I think we have two much in our 401ks
« Reply #27 on: February 23, 2017, 12:45:37 PM »
Speaking of the mortgage...

How many years could you cover by taking out a HELOC on your almost-paid-for house and spending the proceeds to cover the first few years of retirement? Then, when you're over the 59.5 hump, you have the option, but not an obligation, of paying off that HELOC with your 401k. Oh, and BTW you may have been enjoying the mortgage interest deduction the whole time AND unless you invested ultra conservatively your 401k probably grew faster than the after-tax interest rate on the HELOC.

For example, suppose you took out a 15 year HELOC worth 4yrs expenses, and invested the proceeds in relatively safe bond funds, preferreds, REITs, etc. in a taxable account. Every couple months for 4yrs you make a withdraw to cover expenses until that fund is depleted. Every year you earn maybe 5% in the taxable account and pay maybe 2.5% interest on the loan, after tax deduction. Then you turn 59.5 and pay off the HELOC with tax-free funds from your 401k. But only if you wanted to. By then interest rates may be high enough you can't stand to pay off such a cheap loan, so you might keep the game going the whole loan term.

This strategy could at least buy you a couple years, or be used in coordination with another strategy to span the gap.

snapperdude

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Re: I think we have two much in our 401ks
« Reply #28 on: February 25, 2017, 02:39:37 PM »
Even taking the 10% penalty is almost certainly better to shove money into a 401k and traditional IRA than taxable.  So yes, you should be putting money into taxable AFTER maxing out 401k and traditional IRA's if applicable.

If you expect a modest retirement most of your 401k will come out at 0 or 10% tax, adding in a 10% penalty still only gets you to 10-20% tax rate when pulling it out, and only during the few years before you hit 59.5.  If you put it in taxable today you lock in the 25% tax bracket you are likely at forever.

Using 401k before 59.5 is plenty doable, see this link for a nice summary:
http://www.madfientist.com/how-to-access-retirement-funds-early/

Back of the napkin calculation with your numbers:

Assuming your 840k makes 5% this year and you max your contributions at 18k each and get 2k in match your 401(k)s would grow to 920k in a year. This supports 36.8k in annual expenses based on a 4% SWR. After taking out 12.6K standard deduction, you'd be left with 24.2k/year taxable income. Your federal income tax would be about 6.4k including early withdraw penalty on that amount. If you're in the 25% tax bracket, you save 9k contributing 36k to deductible retirement accounts.

Also, $8100 in exemptions. So, 24.2 - 8.1 = 16.1 in taxable income.

LiseE

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Re: I think we have two much in our 401ks
« Reply #29 on: February 27, 2017, 12:03:16 PM »
Quote
For example, suppose you took out a 15 year HELOC worth 4yrs expenses, and invested the proceeds in relatively safe bond funds, preferreds, REITs, etc. in a taxable account. Every couple months for 4yrs you make a withdraw to cover expenses until that fund is depleted. Every year you earn maybe 5% in the taxable account and pay maybe 2.5% interest on the loan, after tax deduction. Then you turn 59.5 and pay off the HELOC with tax-free funds from your 401k. But only if you wanted to. By then interest rates may be high enough you can't stand to pay off such a cheap loan, so you might keep the game going the whole loan term.

... very interesting idea

LiseE

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Re: I think we have two much in our 401ks
« Reply #30 on: February 28, 2017, 01:01:47 PM »
Does this sound right then ....

  • Continue to max our 401K contributions (including the additional 6.5K catchup since I'm 50)
  • )Open a taxable brokerage account to begin building our fund structure for the first 5 years of early retirement (to cover us while we build a Roth Conversion Ladder

Am I correct in my understanding that at age 70.5 we will be forced to start taking RMD from what's left in our 401K's and that it's therefore important to get that 401K balance down as much as possible?

- Lisa


wscott

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Re: I think we have too much in our 401ks
« Reply #31 on: March 04, 2017, 04:53:46 AM »
Summary: No I don't think you have too much in your 401ks, but a little Roth would be good

OK. I updated my optimizer to handle the rest of your situation and answer the question about what to do for the next 3 years.
(I am using you as a handy testcase to debug my software. ;-)

Anyway here is what it suggests doing for the next 3 years:
Code: [Select]
age  save tSAVE   IRA  tIRA  Roth tRoth
 50:     0     4   840    40     0    11
 51:     4     4   933    40    12    11
 52:     9     4  1031    40    24    11

Basically, max out your Roth contributions and then put everything else in a tax deferred account (401k or IRA).
Then leftover in after-tax accounts.  I assumed you would be saving $60k pre-tax dollars each year.
Then your retirement is in the table below. The Roth contributions at age 50-53 are retrieved ages 55-57 to
offset your expenses, but mostly you live off IRA withdrawals paying the 10% penalty until you are 59.5.
I find with these numbers doing a larger Roth pipeline isn't actually worth it.

Also, money in the taxable account is not a good deal because you are probably in the 33% tax bracket currently. You will be at 15% after retirement so money from the 401k is a better deal even after the 10% penalty.

After age 59, a small Roth conversion is done each year to fill out the rest of the 15% tax bracket.
At 70 when Social Security starts then Roth withdrawals start.

Q: does your 401k allow extra after-tax contributions?
https://www.nytimes.com/2015/09/23/your-money/401ks-and-similar-plans/irs-ruling-makes-after-tax-contributions-more-attractive.html

I haven't modeled this yet, but it might apply if you are wanting to save more than $50k/yr


Code: [Select]
age  save spend   IRA  fIRA  SEPP  Roth fRoth IRA2R  rate   tax spend extra
 53:    14    14  1135    82     0    37     0    15    15    21    75     0
 54:    -0     0  1101    94     0    55     0     0    15    20    75     0
 55:    -0     0  1068    79     0    58    11     0    15    16    75     0
 56:    -0     0  1047    79     0    50    11     0    15    16    75     0
 57:    -0     0  1026    79     0    42    11     0    15    16    75     0
 58:    -0     0  1003    74     0    32    15     0    15    15    75     0
 59:    -0     0   985    85     0    19     0    11    15    10    75     0
 60:    -0     0   942    65     0    32    20    31    15    10    75     0
 61:    -0     0   896    85     0    46     0    11    15    10    75     0
 62:    -0     0   847    85     0    61     0    11    15    10    75     0
 63:    -0     0   796    85     0    77     0    11    15    10    75     0
 64:    -0     0   741    85     0    93     0    11    15    10    75     0
 65:    -0     0   684    85     0   111     0    11    15    10    75     0
 66:    -0     0   622    85     0   130     0    11    15    10    75     0
 67:    -0     0   557    85     0   150     0    11    15    10    75     0
 68:    -0     0   488    85     0   171     0    11    15    10    75     0
 69:    -0     0   415    84     0   193     0     4    15     9    75     0
 70:    -0     0   347    13     0   209    26     0    15     4    75   -40
 71:    -0     0   354    13     0   194    25     0    15     4    75   -40

wscott

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Re: I think we have too much in our 401ks
« Reply #32 on: March 04, 2017, 05:18:29 AM »
I was pondering what I just said and realized that I am wrong.

Basically, max out your Roth contributions and then put everything else in a tax deferred account (401k or IRA).
Then leftover in after-tax accounts.

That should be: max 401k, _then_ roth, then after-tax.

The numbers are the same for my assumption that you wanted to save more than your $40k/yr limit on 401k contributions for both of you.
Roth is less desirable than 401k for the same reason the after-tax account is bad, your current tax rate is higher than your retirement tax rate even with the 10% penalty.


My confusion is that I wrote an optimizer to maximize your retirement income and I have to look at the results and intuit why it made certain choices.  The standard rules of thumb of investment order and withdrawal order are generally correct, but the progressive tax brackets means that sometimes it is a win to do things out of order.

dude

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Re: I think we have too much in our 401ks
« Reply #33 on: March 07, 2017, 08:52:53 AM »
^^ If they are both high earners, they may well be over the Roth IRA threshold and unable to contribute anything.

Spork

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Re: I think we have two much in our 401ks
« Reply #34 on: March 07, 2017, 09:03:06 AM »
Quote
If you put it in taxable today you lock in the 25% tax bracket you are likely at forever

I thought that if you hold onto you investment longer than a year you are taxed at lower capital gains tax?


You are correct.  Dividends and long term gains are taxed at a lower rate.  If you can engineer your income below $75,900 (married) you will pay 0%.  If you can keep it below $470,000 (married) then you are taxed at 15%.  The top rate is actually 20% and that's for over $470k.

I am not sure where the 25% comes from unless it's a particular state income tax.  It's not federal.

ChpBstrd

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Re: I think we have too much in our 401ks
« Reply #35 on: March 07, 2017, 10:35:55 AM »
The HELOC idea I posted earlier is looking better and better. No negative tax consequences and possibly a tax deduction. Not complex. No accountant/lawyer needed. Should cover at least 3 years.

cheapass

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Re: I think we have two much in our 401ks
« Reply #36 on: March 07, 2017, 01:49:47 PM »
I thought that if you hold onto you investment longer than a year you are taxed at lower capital gains tax?

You're correct, but the money you put in the taxable account is only 75% of what it would be if you put it in your 401K/IRA (due to your marginal tax rate of 25%)

Spork

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Re: I think we have two much in our 401ks
« Reply #37 on: March 07, 2017, 02:07:56 PM »
I thought that if you hold onto you investment longer than a year you are taxed at lower capital gains tax?

You're correct, but the money you put in the taxable account is only 75% of what it would be if you put it in your 401K/IRA (due to your marginal tax rate of 25%)

...but you also have to look at both sides.  If you have too much in 401k/TradIRA when you hit 70.5, the RMD may push you into a higher rate.  It's a delicate balancing act... and one where you're predicting the future of what the tax system will look like.